FEHB Guide for Feds: the key differences between HSAs, HRAs, and FSAs. Picking an HRA or HSA to cover certain health care expenses based on your needs.
HSA, HRA, and FSA Explained: Key Differences You Should Know
In the complex world of healthcare, understanding the nuances of different savings and reimbursement accounts can significantly impact your financial planning and health care costs. Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and healthcare Flexible Spending Accounts (FSAs) are three popular options that offer unique benefits and limitations.
How Health Savings Accounts Work
A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. To be eligible for an HSA, you must be enrolled in a high-deductible health plan. The primary advantage of an HSA is its triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals to pay for medical expenses are tax-free. This makes HSAs a powerful tool for managing health care expenses and reducing taxable income. Also, you can take your HSA with you if you switch health plans. You can move money from your HSA with one employer to an HSA with a new employer or plan provider.
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Contributions to an HSA and Qualified Medical Expenses
Contributions to an HSA are straightforward. You can contribute pre-tax dollars through payroll deductions if your employer offers this option, or you can make post-tax contributions and deduct them on your income tax return. The IRS sets annual contribution limits, which vary based on whether you have individual or family coverage. It’s important to note that you can only contribute to an HSA if you are enrolled in a qualified high-deductible health plan, and you cannot be covered by any other non-HDHP health insurance plan. Some plans will contribute a portion of the HDHP premium to an HSA on top of the individual limit.
HSA Contribution Limits for 2024 and 2025:
2024 | 2025 | |
| Individuals w/ Self-Only Coverage | $4150 | $4300 |
| Family Coverage | $8300 | $8550 |
Individuals at least age 55 can contribute a catch-up amount of $1000 per year for both 2024 and 2025. This goes for both individual and family plans. |
Qualified medical expenses for an HSA include a wide range of health care costs such as doctor visits, prescription medications, dental care, and vision expenses. The IRS provides a comprehensive list of eligible expenses, which can be paid for using HSA funds. It’s crucial to keep records of all expenditures to ensure they meet the criteria for qualified medical expenses, as non-qualified withdrawals are subject to income tax and a tax penalty.
Can You Pay Premiums for Insurance with HSA Money?
Generally, HSA funds cannot be used to pay for health insurance premiums. However, there are exceptions if the insurance is for health related coverage, such as paying for COBRA coverage, long-term care insurance, or health insurance premiums while receiving unemployment benefits. Some health insurance coverage plans will contribute a portion of the high deductible health insurance premium to the HSA directly – this is on top of the annual IRS limit that’s allowed by account owner contributions.
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Unlike HSAs, HRAs are not portable, meaning the funds remain with the employer if you leave the company. HRAs offer flexibility in terms of what expenses can be covered, as employers can tailor the plan to meet the specific needs of their workforce. Regarding the Federal Employee Health Benefits (FEHB) program, this is for individuals who have an HSA-eligible HDHP but do not qualify for an HSA themselves.
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Is it an HRA or HSA Plan?
Employers that set aside a specific amount of money each year for employees to use for qualified health expenses can contribute funds to an HRA. Employees submit claims for reimbursement, and the employer reimburses them up to the allocated amount. The funds in an HRA are not subject to income tax, making it a tax-efficient way for employees to manage healthcare costs. However, the employee must adhere to the employer’s guidelines regarding eligible expenses. An employee cannot contribute to an HRA. All contributions to an HRA are made by the employer that provides it. An integrated HRA is one that is meant to function in congruence with an individual health or family health plan provided by traditional group health insurance. HRA funds stay with the employer if an employee leaves. That is the main difference between a health savings account and a health reimbursement arrangement.
What Expenses are Covered by an HRA?
The type of HRA and the employer’s plan design determine what expenses are covered. Commonly covered expenses include deductibles, copayments, and other out-of-pocket medical costs. Some HRAs may also cover health insurance premiums, providing additional financial relief for employees. It’s essential to review your employer’s specific HRA plan to understand what expenses are eligible for reimbursement.
What’s the Difference Between HSA vs. HRA?
While both HRAs and HSAs offer tax advantages and help manage health care expenses, there are key differences. HSAs are owned by the individual and are portable, while HRAs are employer-owned and non-portable. HRAs are employer-funded plans. Additionally, HSAs require enrollment in an HDHP, whereas HRAs do not always have this requirement. In FEHB, however, a health reimbursement account only really make sense for those ineligible for an HSA while enrolled in an HDHP. This means they don’t really choose between an HRA and an HSA – it’s one or the other.
Examining Flexible Spending Accounts
A Flexible Spending Account (FSA) or Healthcare FSA (HCFSA) is another tax-advantaged account that allows employees to set aside pre-tax dollars for later withdrawals for qualified medical expenses. FSAs are typically offered as part of a group health insurance plan and can be used to pay for certain health care expenses. However, FSAs come with certain limitations that potential users should be aware of – particularly the use-or-lose nature of the funds. You will lose the money if you don’t make withdrawals to pay for qualified medical expenses by the deadline.
FSA Funds: Use or Lose Funds by End of Plan Year
FSAs work by allowing employees to contribute a portion of their salary to the account on a pre-tax basis. These funds can then be used to pay for qualified medical expenses throughout the year. One of the main benefits of an FSA is the immediate tax savings, as contributions reduce your taxable income. However, FSAs are subject to a “use-it-or-lose-it” rule, meaning any unused funds at the end of the plan year will be forfeited. The list of qualified expenses is much more broad with an HCFSA than when you withdraw money from your HSA, though. Both specify and pay for certain health care related items.
What are the 2025 Contribution Limitations for an FSA?
The primary limitation of an FSA is the forfeiture rule, which can lead to lost funds if not carefully managed. Additionally, FSAs have annual contribution limits set by the IRS, which may not be sufficient for individuals with high medical costs. The 2024 limit is $3200 and expected to increase to $3300 for the 2025 tax year. Unlike HSAs, FSAs are not portable, and the funds cannot be rolled over if you change employers. These limitations make it essential to carefully estimate your annual health care expenses when deciding how much to contribute to an FSA.
Knowledge is Confidence!
Can You Have Both an FSA and HSA?
Generally, you cannot have both an FSA and an HSA simultaneously, as they are both designed to cover similar expenses. However, there is an exception for a limited-purpose FSA, which can be used alongside an HSA to cover specific expenses like dental and vision care. This combination can provide additional tax savings and flexibility in managing traditional healthcare costs. You also cannot participate in both an HSA and HRA simultaneously.
Read more about the differences between an HCFSA and an HSA
Looking at Types of Health Plans
How to Choose the Right Health Plan for Your Needs
When choosing the right health plan, consider factors such as your expected medical costs, tax situation, and employment status. If you anticipate high out-of-pocket medical expenses, an HSA might be beneficial due to its tax advantages and portability. If your employer offers a generous HRA, or you are a fed with an HDHP that is ineligible for an HSA, it could provide significant financial relief for healthcare expenses. For those who prefer immediate tax savings and have predictable health-related costs, an FSA might be the right choice. Evaluating these factors will help you make an informed decision if making a decision between an HCFSA, HSA or an HRA.
Impact of High Deductible Health Plans on Health Savings Accounts
High deductible health insurance plans are a prerequisite for opening an HSA to pay for qualified expenses, and they significantly impact how you manage your annual expenses. While HDHPs typically have lower premiums, this entails higher out-of-pocket spending before insurance coverage kicks in. This makes HSAs an attractive option, as they allow you to save for these expenses tax-free and withdrawals from an HSA are tax-free. Contributions to the HSA are also pre-tax. Understanding the relationship between HDHPs and HSAs is crucial for maximizing your health care savings and minimizing financial strain by using an HSA to pay for medical expenditures. An HSA or HRA with an HDHP is ideal for individuals and families are in relatively good health but an HRA differs from an HSA considerably as the funds from the HRA are owned by the employer unlike an HSA and employers who get an HRA can customize multiple aspects of the agreement. This contrasts with an HSA you as employee own and you can withdraw funds from your HSA as needed, using the portion of your HSA that’s required as health needs arise.
What is a CDHP vs. HDHP?
Consumer-Driven Health Plan (CDHP) simply refers to a plan that combines HDHP insurance coverage with either an HCFSA or an HSA. An HDHP is the traditional health plan itself, whether or not this is held in tandem with one of the healthcare savings accounts. An HRA plus HDHP coverage is not included in the definition of a CDHP although HDHP can be paired with HSAs and HRAs.
How to Maximize Your Healthcare Savings with These Accounts
Maximizing your healthcare savings involves strategic planning and understanding the tax benefits associated with an HSA vs. an HRA vs. FSAs. Each account offers unique opportunities to reduce your taxable income and manage health care costs effectively.
Strategies for Managing Health Expenses
To effectively manage health expenses, consider contributing the maximum allowable amount to your HSA or FSA to take full advantage of tax savings. Keep detailed records of all medical expenses to ensure they qualify for reimbursement. Additionally, explore employer-sponsored HRAs to see if they can cover additional costs not covered by your primary health plan. By strategically using these accounts, you can minimize out-of-pocket expenses and maximize your savings.
Tax Benefits of HSA and a Traditional FSA and HRAs
Each of these accounts offers distinct tax benefits. your HSA can be used to provide a triple tax advantage, making wisely using your HSA one of the most tax-efficient ways to save for medical expenses. HRAs offer tax-free reimbursements for qualified expenses and the money in your HRA is your employers. And healthcare FSAs reduce your taxable income through pre-tax contributions. Understanding these tax benefits and the difference between health insurance and health savings accounts can help you optimize your financial planning and reduce your overall tax liability.
Tips for Employees to Optimize Their Health Options
Employees can optimize their health plans by carefully evaluating their health care needs and financial goals. Consider enrolling in an HDHP to take advantage of an HSA’s tax benefits. If your employer offers an HRA, review the plan details to understand what expenses are covered. For those with predictable medical expenses, an FSA can provide immediate tax savings. By understanding the nuances of each account, employees can make informed decisions that align with their health care needs and financial objectives.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
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